Money

Comparing Interest Rates on a Mortgage

Comparing interest rates on a mortgage is like comparing every Tom, Dick and Harry we’ve dated.

When scouting around for a significant other, one thing that prances in our mind is, “he loves me, he loves me not.” We remember those days when we were young, awash in the notion of romantic love. We’d pluck a flower from someone’s garden and take the petals off one by one singing softly, “he loves me, he loves not.”

Looking for someone special is comparable to tracking down the best mortgage interest rate. The mortgage market is as enticing as money left unguarded on a table, but it’s also one of the more confusing areas of finance that tease the imagination of novices.

First question that pops up when all the preliminaries have been taken care of is: shall we go fixed or adjustable?

You want a mortgage that’s easy on the pocket – one that would not enslave you for the first five to seven years of the mortgage – forcing you to a diet of carrots and potatoes. In plain language, you want a mortgage that will love you back so you can love your house in turn, not look at it disdainfully as a cash-eater.

Be an Attractive Risk when Comparing Interest Rates on a Mortgage

If you’re really determined to get the best interest rates which, expressed another way, is obtaining the lowest of the lowest, no amount of diplomatic or persuasive negotiating will knock off a full percentage point, especially if you have a credit report that’s reeking of missed or delayed payments. It can even be worse if you have a record of having defaulted on a loan in the past.

The first step therefore is to make yourself as attractive as possible before you go on the hunt. Like the metaphor we used earlier, looking for the best rate is like looking for Mr. or Miss Right. Smell nice, tone down the fake jewelry and be honest when the lender asks you about any outstanding debts. He’s going to find out the truth anyway so save yourself some further embarrassment.

What convinces lenders that you deserve to be given the best or lowest mortgage rate?

  • Your credit report indicates you pay bills promptly. Late payments raise the antennas of lenders, and they’re going to use every analytical tool in their books to see if you might be a credit risk or a very attractive borrower they’d like to seduce;
  • Making a larger down payment on your mortgage. By larger we mean more than 5%. Twenty percent (20%) is ideal but if you can dig deeper into your savings and can afford a 35% down payment, go ahead and cough it up. When borrowers put a large sum of money down, it shows the extent of their commitment to their loan obligations. This is not to mean that if you only have 5% to put down, you’re automatically taken off their list. A larger down payment simply indicates you have the financial resources to purchase property, and because you’re putting down a significant amount of money, there is less of a chance you’d run away from the mortgage;
  • During your mortgage application process, avoid applying for more debt – like increasing the number of credit cards you have or asking for an increase in your line of credit. When you have more debts than assets, lenders become sensitive to your capability to meet your obligations. When the number of your loans increases, you’re regarded as a risk. And if you’re a risk, you won’t get that preferred mortgage rate;
  • Just as your mother told you not to fall in love with the first person you meet, don’t fall in love with the first mortgage rate that looks attractive to you. Take in the total landscape, shop until you drop. And be aware that banks are not the only sources of mortgage money. Your credit union might lend you an amount towards the purchase of a house or a discount mortgage broker might come up with alternatives. The government also has flexible housing loan programs.

Comparing Interest Rates on a Mortgage: Is a Fixed Rate Mortgage Right for You?

A fixed rate mortgage is suitable for those who want predictability instead of flexibility. By knowing ahead of time how much you’re going to spend for your house, you can plan a budget, assured that the amounts you make weekly, bi-weekly or monthly will not change during the term of the mortgage.

The fixed rate mortgage is ideal for those who don’t have much room to maneuver within their household budget and need a specific spending pattern. They prefer a clear and definite forecast of present and future expenses, and don’t savor surprises. They don’t care whether the market is on an upswing or downswing. They just want to pay a fixed amount per month and be done with it so they can get on with their lives.

Fixed rate mortgages are by far the most common and the choice of about 75% of first time homebuyers.

For example, you’re interested in a home that’s priced at $200,000.00. Your lender offers you a five year fixed rate mortgage of 6%. This 6% will not change during the five-year term (you can also go for longer terms like 7, 10 or 12 years, but there are different rates for different terms), and you can count on making the same payments every month for the next five years or 60 months. When the five years are up, you speak to your banker to renew the mortgage or shop around for a new one with another institution.

Other features of the fixed rate mortgage is that it is relatively easy to understand compared to the adjustable rate mortgage type, and it serves as a security blanket for people who aren’t sitting on large piles of cash. It caters to those who wish to remain in their homes for the long term.

Is the Adjustable Rate Mortgage For You?

When you’re comparing interest rates on mortgages, one option your lender will offer you is the adjustable rate mortgage, known by its acronym, ARM. As its name implies, the interest rate is not fixed. The rate is determined based on several indices, one of which is the prime rate or the interest on one-year treasury bills. The adjustable rate mortgage is also based on the lenders’ costs. Other factors may also be considered.

Because the adjustable rate mortgage fluctuates with the prime rate, this means that an individual who has selected this type of interest rate is mentally and financially prepared for changes in monthly payment amounts. It usually takes more time to shop around for adjustable rate mortgages.

Some features of the adjustable rate mortgage are:

  • It offers flexibility which is perfect for people who are not planning to stay in their houses for the long term;
  • The initial interest rates start low, so you could benefit from initial low mortgage payments;
  • It’s an excellent mortgage for people who can manage risk smartly and know that higher risks can also translate into higher benefits.

Finally, when discussing an ARM with your lender, make sure you read the fine print and ask him to clarify those points or clauses you don’t understand. The trouble with any industry – the banking industry is a classic example – is that they have their own terminology that most people don’t understand.

When comparing interest rates on a mortgage watch out for terms like the initial rate (sometimes called the “teaser rate”), margin (your ARM is the product of the calculation of the index rate or prime rate AND the margin), interval adjustment period (meaning the interest rate does not change for a given period of time, but will be adjusted after that time to match the index and margin), and rate cap (the maximum rate you’ll need to pay, also known as “ceiling rate”).

You just gotta love mortgages. As Jeremy Hardy (BBC comedian) says, “experts have spent years developing weapons which can destroy people’s lives but leave buildings intact. They’re called mortgages.”

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